September 24, 2019

The market had a give-back week. Is it sick, or just playing dead?

You’ve heard of a possum “playing dead.” I thought it was some voluntary thing it did. If threatened, it falls over and stares into space. It goes limp, stops breathing, discharges its bowels, sticks out its tongue, and drools. Poking it won’t make it budge. It appears dead, falling into a fear-induced catatonic state.

“Playing possum” isn’t an act at all. When it happens, the possum feels no pain and has no reflexes. The marsupial won’t respond, no matter what is done to it – whether it is swatted, bitten, or even if its bones are broken. Many animals don’t like to eat already-dead prey, so they give up and move on.

So, is the market about to roll over or is it just playing dead? Let’s start with last week’s performance:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

All that red is ugly on the surface. But let’s see what really happened. Looking at the various indexes above, you’ll see defensive sectors collecting capital. Real Estate, Utilities, Energy, and Health Care were positive.  Your first thought might be: this is a risk-off rotation. But looking closer you might see a trend.

Growth clearly outperformed value, and the S&P 500 outperformed the DJIA. Yes, the Russell 2000 growth-heavy index was the weakest of the big U.S. indexes. But within Russell, what happened? Once again, value stocks were much weaker than growth.

What about that flight to Real Estate and Utilities? Well, let’s not forget that the Fed cut rates by 25 basis points. Traditionally, rate cuts are good for stocks. But the market wanted more than 25 bps, so they sold the “good news.” When rates go down, investors look elsewhere. Utilities and Real Estate typically offer high yields. Utilities are safer stocks, with a strong dividend history, and Real Estate stocks, specifically REITs, legally required to distribute between 75% and 90% of their profits in the form of dividends.

The devil is in the details, and the details tell us there is not much to worry about. The next place I usually look is to see if there was a lot of big money selling. Last week was a “whole lotta nada” when it comes to selling, so I’m not worried. In fact, there was healthy buying under that weak market surface.

Specifically, there were 193 buys and 59 sells, or more than 3:1 buys. Let’s have a look:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

More Buying than Selling in Most Sectors

Financials saw buying despite a -1.00% sector index performance last week. Health Care, Energy, Utilities, Tech, Industrials, and Real Estate all saw respectable buying in a weak-looking tape. And when the market looks sick, we should see selling. I don’t see anything noteworthy at all.

“But wait!” you might say, “If there’s a sore spot on that index table, it’s Semiconductors. I mean look at a that: Down 2.66% in a week. Yuck.”

Before you get down on semis, take a closer look. The PHLX Semiconductor Index sank for sure, but that’s a space that’s seen a lot of buying recently.  In fact, a TMT fund trader asked us to look at where the big money was moving in and out of Tech Media and Telecom, so we did a detailed report for the past two weeks of activity, getting down to the stock level. The quick and dirty summary is in this table:

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

First, you’ll notice there are more buys than sells the past two weeks in TMT (Technology, Media, and Telecommunications). You’ll also see a big rotation out of Software and into Semiconductors. The outlier selling moved right out of Software to semis. This represents profit-taking in a crowded industry group.

Finally, we look at the trusty Big Money Index, which looks at big money moving in and out of stocks for the whole market, smoothed over time.  It helps us to get an idea of the trend of investment in or out of the market by the biggest investors out there. Well, that thing bounced hard off a key level.  Usually when the index falls below 45%, we can expect lower market prices.  Well, talk about a head fake: It rocketed to 64.5% in a very short time.  That means one thing and one thing only: Big money is buying stocks fast.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

What looks like a soft market to some looks like just a pause to me. I think the market is taking a breath before moving higher. The global equity climate still places the U.S. firmly as the “best in show.”  Rates continue to plummet, and equities become even more attractive.  There’s nowhere else to go.

Peter Lynch managed the Magellan Fund at Fidelity Investments from 1977 to 1990. He averaged 29.2% annualized return, consistently more than twice the S&P 500, making it the best-performing mutual fund in the world. While there, assets under management went from $18 million to $14 billion, so he knows a thing or two about stocks. He said: “The key to making money in stocks is not to get scared out of them.”

About The Author

Jason Bodner

Jason Bodner writes Sector Spotlight in the weekly Marketmail publication and has authored several white papers for the company. He is also Co-Founder of Macro Analytics for Professionals which produces proprietary equity accumulation/distribution research for its clients. Previously, Mr. Bodner served as Director of European Equity Derivatives for Cantor Fitzgerald Europe in London, then moved to the role of Head of Equity Derivatives North America for the same company in New York. He also served as S.V.P. Equity Derivatives for Jefferies, LLC. He received a B.S. in business administration in 1996, with honors, from Skidmore College as a member of the Periclean Honors Society. All content of “Sector Spotlight” represents the opinion of Jason Bodner


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